Do you want to start investing in stocks but don’t know where to start? Well, if that’s the case then you’ve come to the right place. The biggest misconception about investing is that it’s made and reserved for the rich, and we’re here to break that stereotype. With so many investment opportunities and streams opening up every day, enabling access to the investment market for everyone, there’s absolutely no reason to skip out anymore. In this blog, we present to you, a step-by-step guide on how to get started.
Step 1: Understand the importance of investing.
To start investing you need to understand what happens to the money in your bank account over time. Money loses its value over time due to something called inflation. Inflation in simple terms means “the upward movement in the overall price level of goods and services in an economy”. Inflation today is close to 2.5% and this means that things cost 2.5% more than they used to a year ago. In simple terms, if you stack ten thousand rupees in a piggy bank today, in 10 years that money won’t be worth ten thousand rupees. Now, if you think of opening a savings account to save the value of your money, you have to know that no savings account has an interest of more than 0.5% a year. This means your money increases by 0.5% a year but inflation stands at 2% which means you’re still losing money. So to save your money from losing its value you have to start investing. With investing, you’re retaining the value of your money and making more (if done right).
Step 2: Decide which shares you want to buy.
Before getting into it you have to understand what shares are and what are the different ways of investing. A share is a percentage of ownership in a company or a financial asset. This means that if you buy 1% shares of a company you own 1% of that company.
There are mainly 2 different ways in which you can invest in stocks and they are as follows:
- Individual stocks: This is when you invest a lot of money in one single company/stock.
- Index funds- To understand index funds you have to understand what a fund is. A fund is where investors will pool their money. This means that multiple investors would invest in the same fund and then that fund would have a fund manager and he/she decides which companies the fund is going to invest in. So a fund manager essentially manages the money of many people and then invests in various companies rather than just investing in one company. This allows you to not worry about losing all your money at once. Index here refers to stock market index so an index fund is a kind of mutual fund that automatically invests in all the companies that are in the index of a specific list. For example, S&P 500.
Beginners are advised not to invest in individual stocks this is because it is too risky as there is a chance of losing a lot of money at once if the company is not doing well in the market. Individual stocks should only be invested in if you have enough time to do your research and are positive that the company will keep doing well for the years to come. On the other hand, beginners are advised to invest in Index funds, firstly because they are much safer and simpler to invest in. Secondly, they give you a decent amount of diversification as there are all sorts of companies that make it to the stock index. So you’re not entirely reliant on one particular sector. Thirdly, index funds have really low fees, because it is essentially an algorithm that decides what to invest in and so you have to pay a very minimal fee.
Step 3: Decide the amount of money you want to invest.
Although indeed, the stock market will most certainly rise in the long run, there is still no lie in the fact that there is always some uncertainty linked to the market. For instance, During Covid-19 the market was down by 40% which caused a lot of panic among investors. Hence, before deciding how much money you want to invest, keep the following points in mind:
- Don’t invest large amounts in stock if you haven’t paid off your debts.
- Put aside enough money to sustain for at least the next 4 to 6 months. So that if you lose your job or have any medical emergency you have enough money to spare and do not have to rely on your stock market investment.
- Don’t put any money in stocks that you might need anytime in the next 3 to 5 years. Stock investment should only be made if it is long-term.
Step 4: Find a suitable online broker
Do your research, read reviews online, and look for a suitable online broker that can help you get started and charge a minimal fee. Some examples of online share brokers in India are ICICI Bank, HDFC Securities, Upstox, etc. Once you’ve found a good online broker and made your account. You will be required to verify your identity, fill forms with personal information and go through other formal hoops all of which can take a few days after which you can start investing money in the stock market.